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This Just In: More Upgrades and Downgrades

Analysts see big things for Informatica and Viacom, but drop "Big Coal" down a hole.

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

The "good "news firstShares of Informatica were running like clockwork today, ringing up a 4.5% gain in early trading, despite a generally down market. For this, you can thank the friendly analysts at Evercore Partners and RW Baird. According to StreetInsider.com, both stock shops slapped "buy" ratings on Informatica this morning, with Evercore assigning a $39 price target to the stock, and Baird bidding even higher -- $40 a share.

These ratings come on the heels of a similar "outperform" rating from Wedbush last week, which argued that "a rare quarterly miss" back in July has helped to put a lid on the stock's valuation. This is a good thing, according to Wedbush, because it has given investors "a compelling entry point for a high-quality name, a company with a strong position in its core markets, a capable management team, and growth opportunities in cloud computing and Big Data." But is this an opportunity you should take advantage of?

With apologies to my Foolish colleagues who've endorsed the stock, I'd argue: no. On one hand, it's true that after issuing an earnings warning back in early July, Informatica shares quickly fell from the mid-$40s down into the low-$30s. That's cheap­er than they used to cost, but they're not yet cheap. The P/E on this stock is 33, and weak free cash flow gives Informatica an even high price-to-free cash flow ratio. In neither case, however, do the numbers look compelling based on projected long-term earnings growth of less than 17%. Wall Street's bull thesis just doesn't compute.

Tune in to Viacom?Better advice on the bargains front came to us this morning courtesy of the analysts at Pivotal Research, who argue that the market has been too short-sighted about Viacom. Last week, as you may recall, Wunderlich downgraded Viacom based on worries "over declining ratings at Viacom's youth-centered Nickelodeon and MTV channels."

But here's the thing: Ratings fluctuate over time. (Want to hear about waxing and waning in the networks game? Ask NBC -- low-rated now, but once considered a powerhouse of ratings wizardry back in the Friends era.) Value, in contrast, tends to remain intact longer, and Viacom stock has value in spades. At just 14.3 times earnings, the stock's hardly expensive for the 16% long-term earnings growth it's expected to deliver. And Viacom's even cheaper than that, when valued on free cash flow.

Meanwhile, investors who are forced to sit around, watching their stock languish until Wall Street notices how cheap Viacom is, get to collect healthy 2.2% dividend checks while they wait. In short, Pivotal is right: There's no need to change the channel on Viacom. As a business, and as an investment, this stock is doing just fine.

"I'm down in a hole ..."If only we could say the same about the coal miners. Last month, investors got a taste of what was to come in this industry when analysts at Imperial Capital made the case for selling James River Coal. This month, Dahlman Rose is making a similar case for cutting back on buying shares of three other coalminers: Alpha Natural Resources, Walter Energy, and Peabody Energy.

Arguing that the coal market remains "weak," Dahlman lopped about 8% off of its EBITDA target for Alpha Natural in 2012 and cut its estimate for the 2013 take by more than one-third. The analyst is similarly pessimistic about the opportunities for upside at Peabody and Walter -- but not quite so frightened as to counsel actually selling any of the three stocks. To the contrary, the analyst goes out of its way to argue that all three companies have strong balance sheets and are likely to weather the storm just fine, even if less profitably than previously expected.

Investors might not want to be so sanguine. At last report, Walter's balance sheet was loaded with more than $2.1 billion in debt -- a level even larger than its own market cap. Peabody has a net-debt load of $5.9 billion, while Alpha Natural, with net debt in excess of $2.5 billion, is arguably the most over-leveraged of the bunch. (Not all miners are in similar straits, by the way. In fact, if you're looking to make some money from natural-resources stocks, we'd encourage you to read our new report and find out about The Tiny Gold Stock Digging Up Massive Profits.)

Dahlman, meanwhile, continues to pooh-pooh these concerns, arguing that Alpha, for example, "amended its credit facilities in late June and began the year with substantial cash, so we do not foresee liquidity issues through 2013." But honestly, with a debt load more than twice its own market cap, Alpha looks to me less like a company and more like a big corporate IOU, with a coal business attached to it. As for Dahlman's assurances that everything's going to work out just fine in the end, I've got just two words in response:

Author

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.